Century Aluminum Company — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Century produces primary aluminum at smelters in the United States and Iceland. Grundartangi and Sebree operated at full capacity; Hawesville and Mt. Holly operated at approximately 40% and 50% of capacity, respectively. Financial amounts below are in U.S. dollars; figures are rounded to millions unless noted.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $388.8 million | $326.8 million | $754.6 million | $645.6 million |
| Gross profit | $22.5 million | $5.6 million | $39.3 million | $2.5 million |
| Operating income (loss) | $12.9 million | ($4.9 million) | $18.1 million | ($18.5 million) |
| Net income (loss) | $7.1 million | ($9.5 million) | ($8.0 million) | ($25.7 million) |
| Diluted earnings (loss) per share | $0.07 | ($0.11) | ($0.09) | ($0.29) |
- Gross margin improved to approximately 5.8% in Q2 from 1.7% a year earlier; for the first half it was approximately 5.2%, versus 0.4%.
- Six-month operating cash flow was $3.1 million, down from $23.6 million. Investing activities used $5.1 million, including $18.8 million of capital expenditures, partly offset by $13.6 million from the Ravenswood sale. Cash decreased $1.7 million during the half.
- Cash and cash equivalents were $130.7 million at June 30, 2017. Current assets were $457.7 million and current liabilities were $175.5 million.
- Debt was $255.7 million: $247.9 million carrying value of 7.5% senior secured notes due June 2021 and $7.8 million of industrial revenue bonds. No revolving-credit borrowings were outstanding. Net availability under the U.S. and Iceland facilities was $85.7 million and $50.0 million, respectively.
Changes versus the prior comparable periods
- Q2 sales increased $62.0 million, primarily from $65.9 million of higher market prices, partly offset by unfavorable volume and mix. First-half sales rose $109.0 million, principally reflecting $108.7 million of higher market prices.
- Higher price realizations drove improved gross profit, but were partly offset by higher alumina costs ($34.8 million in Q2 and $35.5 million for the half) and power costs ($14.0 million in Q2 and $28.9 million for the half).
- Q2 returned to profitability, but the company remained loss-making for the first half. First-half results included a $13.2 million loss on forward and derivative contracts, compared with a $0.7 million gain in the prior-year period.
- First-half operating cash flow declined, mainly due to a $25.2 million increase in trade receivables associated with longer payment terms as direct end-user sales increased, and the prior-year receipt of a $12.5 million Mt. Holly contingent earn-out.
Outlook, risks and contingencies
- The filing provides no specific earnings or aluminum-price guidance. Management estimated 2017 capital spending of approximately $30 million, primarily for smelter maintenance and investment projects.
- Aluminum prices, regional premiums, production and shipment volumes, and costs for power, alumina, carbon products and labor are key drivers. Power is the largest operating cost; management estimated that a $1/MWh change would affect annual costs by approximately $11.1 million at normal capacity for the listed U.S. facilities. Hawesville and Mt. Holly were operating below full capacity.
- Glencore owned 42.9% of common shares (47.5% on a fully diluted basis) and all outstanding Series A convertible preferred stock. Approximately 76% of first-half sales were to Glencore. Sales and alumina supply arrangements with Glencore were stated to run through 2017; most derivative gains and losses in the period related to Glencore transactions.
- At June 30, open aluminum forward sales contracts covered 36,090 tonnes; the company also had 7,386 tonnes of fixed-for-floating swaps and power-price swaps covering 256,200 MWh. Derivative liabilities were $7.5 million, with derivative assets of $0.4 million.
- A $23 million retiree medical settlement, recognized as a liability and expense in 2016, remained subject to final court approval. It provides for $5 million upon approval and $2 million annually for nine years thereafter. Approximately $9.6 million of additional PBGC pension contributions remained; certain payments had been deferred with security provided.
- Environmental and legal matters include the Vernon environmental indemnity case and St. Croix refinery-related claims. The company said outcomes and potential losses could not be estimated for certain matters; it did not consider currently assessed exposures likely to materially affect its financial condition, results or liquidity.
- The company was in compliance with credit-facility covenants. Its U.S. fixed-charge coverage ratio was below 1.1 to 1.0, but the springing covenant applied only when facility availability was at or below $15 million; reported availability was $85.7 million.
Most important facts for investors to verify
- Whether stronger aluminum pricing and higher gross profit persist, and how alumina and power costs affect margins.
- Whether working-capital needs, particularly receivables and inventory, continue to constrain operating cash flow.
- The extent of reliance on Glencore for sales, alumina supply and financial contracts, including the terms of arrangements beyond 2017.
- Liquidity under reduced production or weaker prices, including borrowing-base availability, power-related letters of credit and pension obligations.
- Final court approval and payment timing for the retiree settlement, and developments in environmental and other legal contingencies.
- Actual 2017 capital expenditures versus the approximately $30 million estimate; interim results are not necessarily indicative of full-year results.